August 20, 2007
THE SOURLIS LAW FIRM
2 Bridge Avenue
Red Bank, New Jersey 07701
Phone: (732) 530-9007
Fax: (732) 530-9008
August 20, 2007
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: File No. S7-11-07 SEC Release No. 33-8813
Ladies and Gentlemen:
The Sourlis Law Firm has the following comments to Release No. 33-8813, Revisions to Rule 144 and Rule 145.
Our law firm is a boutique and prominent securities law firm counseling and advising brokerage firms, high net worth individuals and private and publicly traded companies located throughout the world.
We would like to see the rules address the following:
1. The proposed Section (i)(2) of Rule 144 permits securities once purchased in a shell to be resold 90 days after the Form 10 information is filed, without registration, if the conditions of the proposed Rule 144(i)(2) are met.
We currently see securities being redeemed by shell companies because of the concern that Worm/Wulff may apply in the private resale of such securities. We would like further clarification and codification of the proposed rules to address whether and when securities purchased in a shell can be resold in a private transaction.
2. Hypothetical scenario: A private company (Private) purchases a shell Issuer (Pubco), one described in Section (i)(1)(i) of Rule 144. Immediately after the purchase, Pubco commences all operations through Private and ceases to be a shell. Within four (4) business days, Pubco files Form 10 information with the Commission reflecting its status as an entity that is no longer an issuer described in Section (i)(1)(i). Thereafter, Pubco performs a short form merger and collapses Private into Pubco. In the collapse, Private shareholders receive pro rata stock in Pubco.
The current Rule 144(d)(3)(i) provides that securities received in a recapitalization are deemed to have been acquired at the time the securities surrendered in the recapitalization are acquired. Although the term recapitalization is not defined in the current Rule 144, the Staff historically has emphasized the following three criteria in determining whether a transaction is a recapitalization for purposes of Rule 144(d)(3)(i):
a. No consideration may be paid by the shareholders for the securities received in the transaction other than the securities surrendered
b. All of the holders of the securities to be exchanged must be offered the opportunity to participate in the recapitalization and
c. There must be continuity of the economic risks of investment.
The Staff has previously concluded that tacking was permitted for purposes of Rule 144(d) when there was no change in proportional ownership of the successor holding company and the economic risk of ownership was not affected by the reorganization. In the above scenario, we believe Private shareholders would be able to tack their holding period.
Under the current proposals, Private shareholders would start a new holding period and would lose the chance to tack. As a result, it would appear that the shareholders in Pubco would be able to resell their securities sooner (90 days after Form 10 information is filed) than the shareholders in Private (6 months after Form 10 information is filed).
In the scenario outlined above, we recommend the following:
(i) Permit Private shareholders to tack their shares and
(ii) Permit Private shareholders to resell their securities 90 days after Form 10 information is filed pursuant to proposed Rule 144(i)(2).
The benefits of the above recommendations:
(i) No dilution to Private shareholders
(ii) Level the playing field - allow Private shareholders to resell their securities when shell shareholders are able to resell their securities and
(iii) Encourage shell reverse mergers – shell companies do not carry the due diligence concerns of trading shells (hidden skeletons) and shell companies offer better and cleaner ways for private companies to go public.
Thank you for your consideration of our comments.
The Sourlis Law Firm